Explained: Chinese Dominance Of The Critical Minerals Supply Chain And The Risks

The world faces major challenges in responsibly sourcing large quantities of minerals that are critical for energy transition.

Consumption of these critical minerals - most notably nickel, copper, lithium, and cobalt - is projected to rise, largely driven by their use in the renewable energy sector.

There is growing concern that a high level of dependence on China for these minerals and their derivative products may create energy security risks.

What is the relation between geographical concentration and supply chain vulnerability?

Critical minerals have highly complex global supply chains with a high degree of concentration in the extracting and processing countries resulting in high supply risks.

Production and processing operations are concentrated in a small number of countries, including some with unstable political and social environments.

The concentration of production in one or a few countries makes the supply chains relying on those minerals vulnerable not only to market power and logistical risks but also to geopolitically induced disruptions, especially through trade restrictions.

For example, in 2010, China suspended exports of REEs to Japan for 59 days over a territorial dispute. The impact was such that the prices of rare earth oxides increased in the range of 60 per cent to 350 per cent and returned to the pre-dispute levels after a year.

How government control affects the supply chain of critical minerals?

The issue of government control has garnered increased attention since the Russian invasion of Ukraine.

There is a growing concern that reserves of critical minerals outside the European Union and the United States are owned largely by governments.

In contrast, the US government has no direct control over the operations of US-based companies unless it invokes legislation such as the Defense Production Act. Those governments, especially China, could interfere in the operations of private firms located in their countries.

Some countries are also taking new steps to protect their critical minerals against foreign control. In April 2022, Mexico nationalised its lithium industry to limit Chinese or US influence.

How real is China threat?

China dominates the midstream (chemical refining and processing) and downstream (manufacture of major components) of critical minerals supply chains but not upstream production.

China is the dominant global player in refining strategic minerals. It refines 68 per cent of nickel globally, 40 per cent of copper, 59 per cent of lithium, and 73 per cent of cobalt.

Australia and Chile host more than 70 per cent of global lithium extraction, and Congo hosts nearly 70 per cent of cobalt extraction.

For copper extraction, Chile and Peru, the two largest players, account for more than 40 per cent of the global share.

How China is securing raw material supplies?

Given tight mineral supplies, and demand for critical minerals rapidly increasing, Chinese companies are striking new deals for minerals globally to secure raw mineral inputs.

This includes direct investments in mining projects and companies, part-equity-stake deals, and extended supply sales agreements with mining companies.

In January 2022, BYD, one of the largest automakers in China, was awarded a contract to extract 80,000 metric tons of lithium in Chile over 20 years, although the contract has been suspended by a Chilean court.

In 2018, China’s Tianqi Lithium purchased a 24 per cent stake in SQM, one of only two major lithium producers in Chile.

Similarly, Ganfeng Lithium, one of the major lithium producers and refiners, has acquired stakes in mining projects in Argentina, Ireland, Chile, and Australia.

CATL, the world’s largest EV battery manufacturer, has acquired Canada-based Millennial Lithium, as well as stakes in an Australian lithium mining company and in copper-cobalt mines in the DRC.

At the start of 2022, Suzhou CATH Energy Technologies entered into an agreement under which it will invest $240 million in the Manono lithium and tin project in the DRC in a joint venture with AVZ Minerals, earning a 24 per cent equity interest.

Chinese companies have remained the largest source of foreign investment in the nickel sector in Indonesia and Chinese-backed companies own or have a financial stake in 15 of 19 cobalt-producing mines in the DRC.

What is the concern about Source of Control (SOC) in respect of such minerals?

Assessing the fragility of supply chains requires identifying the parties that have a substantial degree of control over the producers of critical minerals. Such parties are identified as Source of Control (SOC).

Production of a mineral could be widely dispersed globally, but a particular entity may have ultimate control (including through subsidiaries) over the decisions of the top firms producing that mineral, even if they are in different countries.

For example, the two largest players in cobalt are no longer the Democratic Republic of the Congo and Russia but the Glasenberg family (from South Africa) and China, even though, Congo accounted for 69 per cent of global production in the year 2020 and has 46.1 per cent of global proven reserves.

Similarly, Australia produces more than half of the world’s lithium, followed by Chile and China.

However, Chinese control 33.1 per cent of the total market and about 50 per cent of the production of large firms - Talison Lithium and Ganfeng Lithium, which are among top three lithium-producing companies are controlled by Chinese.

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